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Warning: Dealership Settlement Scam

Published August 30, 2010

Original publication date:  August 14, 2012

I have recently seen an increased amount of what I call the Dealership Settlement Scam.  Broadly, these are instances where a consumer purchases a vehicle that he is dissatisfied with (whether or not it meets the requirements of the Lemon Law), and when he takes up this matter with his dealership, ends up getting scammed into buying another vehicle even though he is told he is getting a free replacement.

The first thing that the owner of a defective vehicle must realize is that if it was purchased or leased new, the dealership is not responsible for providing a refund or replacement under the NYS Lemon Law.  The Lemon Law, ultimately, is a warranty enforcement statute.  The warranty comes from the manufacturer, and it is the manufacturer's responsibility to repurchase or replace a vehicle if the requirements of the Lemon Law are not met.  If the manufacturer does not abide by its obligations under the Lemon Law, it's the manufacturer that is going to be sued, not the dealership. 

Thus, the dealership has no reason at all, from a legal perspective, to do anything for you because there is no legal liability.  For this reason, I am immediately suspicious if a dealership, rather than the manufacturer, is offering to resolve a new car Lemon Law case.  You should be suspicious too.

The second thing to consider is that every dealership is in the business of buying and selling vehicles.  That is how they make the bulk of their profits.  The unhappy owner of a vehicle, in a weird sort of way, is exactly the type of person they are looking for - since it is somebody who will likely be looking to buy a new vehicle at some time in the near future.

So here is how the scam works. 

The consumer (we'll call him Joe), buys a brand new Nissan Maxima from his local Nissan dealership (it can be any manufacturer, but we will use Nissan in this example).  In order to pay for the vehicle, he finances it.  Over the course of the next few months he has a persistent water leak and has the vehicle repaired several times.  In fact, it has been repaired to the point that the requirements of the NYS Lemon Law are clearly met.

Last week it happened again, so Joe marched into his local dealership and demanded to speak with the General Manager.  A few minutes later Joe is sitting in the GM's comfortable office.  The GM, seemingly concerned, asks Joe to recount what has happened.  Joe describes the issues he has had with the vehicle and the amount of repairs it has been subjected to.  He mentions that his boss has been upset due to missed days from work.  He lets the General Manager know how upsetting it was to make payments on a vehicle when it seems like it's at the service department more often than not.

The General Manager listens to all this and when Joe is done, he apologizes profusely.  "Joe, I can't tell you how sorry I am to hear that this has happened to you.  This really is completely unacceptable.  We take our customer relationship's very seriously, and I wont allow this continue.  Joe, we are going to get you into a brand new Maxima right away!"

Joe, of course, is very happy to hear this.  The General Manager tells Joe to sit down with Tommy who will handle the details of the replacement vehicle.  Joe does indeed sit down with Tommy, but this is where it gets a little bit tricky. 

Here is where the scam comes into play.  On a legitimate Lemon Law replacement transaction, there is no vehicle being purchased at all.  Rather the vehicle is given to you in exchange for the old vehicle (subject to a cash contribution from the consumer if the MSRP of the new vehicle exceeds that of the old one).  If there is financing on the old vehicle, one of two things happen.  Usually a Substitution of Collateral should be executed (so that the terms of the financing are not changed, but the bank accepts the new vehicle in place of the old one as collateral on the loan).  In some situations, new financing is executed on the new vehicle in an amount sufficient to payoff the loan on the old vehicle.  However, either way, there is no Purchase Contract being executed on a legitimate Lemon Law replacement transaction.

In our example, however, Joe is presented with a big stack of papers, one of which is a Purchase Contract.  Little does Joe know that he is not being given what he would understand to be a replacement.  The dealership is selling him a new car!  At this point the dealership can make money on the so-called replacement transaction in all the ways it makes money on any new car sale.  First, they can try and sell the new vehicle for a high price.  Second, they can give a low price on the trade in.   Finally, they can make money by selling a new finance contract, perhaps at inflated interest rates.

The essential problem is they are selling Joe a car instead of giving him a new one in exchange for the old one.  As I mentioned before, dealerships buy and sell vehicles in the regular course of their business every day.  There is nothing inherently wrong with that.  The problem here is when they tell their customer they are replacing a defective vehicle, when in fact they are selling them something else and making another profit. 

When Joe purchased his Nissan Maxima he sat down and negotiated a good price on it.  He traded in an older vehicle and got a good price on that as well.  He took advantage of an advertised 0% financing incentive.  In short, he was an informed consumer, and got a reasonable deal on his purchase.  The dealership made some money on the transaction, as it should, but not a windfall.

But now that Joe is sitting in a cubicle with Tommy, being told that his vehicle is being replaced, he doesnt see the need to negotiate.  If he does notice in the big stack of papers he is given to sign that there are some numbers that perhaps don't look right, Tommy tells him it is just for the bank and that he shouldn't worry.  He is getting his old car replaced.   Every time Joe asks about something he is given a song and a dance about how it's difficult to explain but he shouldn't worry - that they are taking care of him and everything will work out in the end.  The problem is that in the end, the dealership is making a windfall on this new transaction, and the money is coming directly out of Joe's pocket.

An important thing to realize is that Joe isn't stupid.  He is simply in over his head because he doesn't understand the mechanics of a legitimate Lemon Law replacement transaction.  That, and he trusts the people who are looking into his eye and making promises.  As much as we like to say and think that we don't trust strangers, most of us, as a matter of human nature, do not expect others to lie to our faces.  It often comes as a complete surprise to people who consider themselves pretty sharp when they find out they were scammed.

Unfortunately for Joe, when all is said and done his monthly payments are probably much higher than they used to be.  Or perhaps it's the same payment, but drawn out another year or two.  The new car works fine, but he was indeed scammed.  If he had asserted his Lemon Law rights against the correct party, Nissan North America, he would likely be in the same new car, and also would keep his old payment amounts and equity in the vehicle.  It also wouldn't have even cost him a dime in attorney fees if he retained a legitimate Lemon Law attorney to represent him.

Unfortunately, I see this sort of thing happen several times a month.  Sometimes, like in our example, where there is a very strong lemon law case.  Often it is brought to my attention when it is already too late to do anything about it. 

If you are ever in a position where you think you may be getting scammed by a dealership, you should feel free to call me so that we can discuss the issue at no cost to you.


Eugene Krukas, Esq.

2704 Grand Ave

Suite 4

Bellmore, NY 11710

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